In the real world, ice cream doesn’t equal salad and borrowed money doesn’t equal earned money. Yet in the government accounting world, state and local governments can record loan proceeds (aka borrowed money) as revenue (aka earned money).
How can state and local governments get away with this? Shouldn’t there be rules against this misleading accounting? Well the rules, set by the Governmental Accounting Standards Board, allow governments this and several other misleading and confusing accounting practices.
Governments follow modified accrual accounting, which is similar to cash-basis accounting. With cash-basis accounting, governments can claim the money they borrow from bondholders and other governments as revenue. Even though this money is supposed to be paid back, the governments treat it as if they earned it. This is like you thinking that when you take out a loan you earned the money. Furthermore, governments only report what they spend in cash but not what they charge to their credit cards. This would be like you touting a few hundred dollars in your savings account while ignoring your thousands of dollars in credit card debt.
The Governmental Accounting Standards Board is trying to uphold this faulty and misleading accounting practice. You can help us stop governments from cheating on their diets. Join the fight today! Use the Disqus comment tool below to let us know your thoughts.